We get frequent inquiries from SaaS platforms and start ups about becoming a PayFac or Payment Facilitator.
For most the benefits of quick, frictionless payment onboarding is the primary reason they are looking at the PayFac business model for their SaaS offering.
As the Payment Facilitator they embed a payment solution into their core product offering and make signing up to use the payments component very simple. That means less than an hour between the simple application and the ability to accept payments.
Coupled with the opportunity to generate a new revenue stream from their client’s transaction fees, the PayFac model is very compelling.
But there is another compelling reason and that is: Who OWNS the customer when it comes to payments?
If you have a payments partnership where you essentially refer your client’s to the payment partner and receive a revenue share it is likely that they own that customer. Most times there is really no issue but here are two areas where this can become problematic:
1-You are selling your business and the potential buyer has different plans for your payment solution. The process of converting/migrating the end customers to a new provider can be problematic at best and if you current partner is not willing to export full card and ACH data [ Data Hostaging ] this process would be a nightmare.
2-You are a larger company with more pressure to fully “own the customer”. The same issues as above are prevalent.
By exploring PayFac options you become closer to that customer and much more in control of the payment process.
You have two options:
1-Full fledged PayFac: Your business owns the entire payments ecosystem. You handle payments, payouts, chargebacks [payment disputes], customer inquiries about payments and more. Typical start up costs exceed 100k, integration may take 6 months and you will have to devote staff to compliance, risk mitigation and more.
2-Hybrid PayFac: In essence you are a sub PayFac meaning you are working with a full fledged Payment Facilitator. You have input into how your sub merchants get paid, what pricing will be and more. There is typically help from your PayFac partner with compliance, risk mitigation and more. Your up front costs are typically just your dev time. As the Hybrid PayFac model is a relatively new offering the development is typically much simpler [via better API’s]. Traditional PayFac’s tend to use legacy technology.
So why go the full blown route?
2 Reasons:
1-If you have a large enough user base and potential transaction volume you may be able to get better “buy” rates so that your profit margin on transaction fees is larger.
2-In the hybrid model if your sub client is ABC Martial Arts their end customer would see SPS* ABC Martial Arts” where SPS stands for parent PayFac. In true PayFac model no prefix on the customer statement.
Becoming a true Payfac means a commitment to becoming a payments company. The amount of time, money and staffing demanded means you simply must devote the time and expense to developing an ongoing payments division.
Both of these options typically mean you will have to assume payments related risk and potential compliance demands. As you might expect these are more onerous as a true Payfac .
If you decide to move forward we are here to help. If not we try and suggest options for you. Ultimately we want long term success for your business.
